Question 1

Which of the following statements is CORRECT?

Accepted Answer

A) Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued. 
B) Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature. 
C) A sinking fund provision makes a bond more risky to investors at the time of issuance. 
D) Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. 
E) If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price. 
A) Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond has been issued. 
B) Most sinking funds require the issuer to provide funds to a trustee, who saves the money so that it will be available to pay off bondholders when the bonds mature. 
C) A sinking fund provision makes a bond more risky to investors at the time of issuance. 
D) Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. 
E) If interest rates have increased since a company issued bonds with a sinking fund, the company is less likely to retire the bonds by buying them back in the open market, as opposed to calling them in at the sinking fund call price.

Question 2

Which of the following statements is CORRECT?

Accepted Answer

A) Two bonds have the same maturity and the same coupon rate.However, one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate. 
B) A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond. 
C) Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used. 
D) Two bonds have the same maturity and the same coupon rate.However, one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate. 
E) The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity.Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond. 
A) Two bonds have the same maturity and the same coupon rate.However, one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is below the coupon rate than if it is above the coupon rate. 
B) A callable 10-year, 10% bond should sell at a higher price than an otherwise similar noncallable bond. 
C) Corporate treasurers dislike issuing callable bonds because these bonds may require the company to raise additional funds earlier than would be true if noncallable bonds with the same maturity were used. 
D) Two bonds have the same maturity and the same coupon rate.However, one is callable and the other is not.The difference in prices between the bonds will be greater if the current market interest rate is above the coupon rate than if it is below the coupon rate. 
E) The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity.Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A) Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par.The premium bond must have a lower current yield and a higher capital gains yield than the par bond. 
B) A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate. 
C) If a bond sells at par, then its current yield will be less than its yield to maturity. 
D) If a bond sells for less than par, then its yield to maturity is less than its coupon rate. 
E) A discount bond's price declines each year until it matures, when its value equals its par value. 
A) Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par.The premium bond must have a lower current yield and a higher capital gains yield than the par bond. 
B) A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate. 
C) If a bond sells at par, then its current yield will be less than its yield to maturity. 
D) If a bond sells for less than par, then its yield to maturity is less than its coupon rate. 
E) A discount bond's price declines each year until it matures, when its value equals its par value.

Question 4

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64%
AAA = 8.72% BBB = 10.18%
The differences in rates among these issues were most probably caused primarily by:

Accepted Answer

A) Real risk-free rate differences. 
B) Tax effects. 
C) Default risk differences. 
D) Maturity risk differences. 
E) Inflation differences. 
A) Real risk-free rate differences. 
B) Tax effects. 
C) Default risk differences. 
D) Maturity risk differences. 
E) Inflation differences.

Question 5

Ezzell Enterprises' noncallable bonds currently sell for $1,165.They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000.What is their yield to maturity?

Accepted Answer

A) 6.20% 
B) 6.53% 
C) 6.87% 
D) 7.24% 
E) 7.62% 
A) 6.20% 
B) 6.53% 
C) 6.87% 
D) 7.24% 
E) 7.62%

Question 6

Listed below are some provisions that are often contained in bond indentures.Which of these provisions, viewed alone, would tend to reduce the yield to maturity that investors would otherwise require on a newly issued bond? 
1)Fixed assets are used as security for a bond.
2)A given bond is subordinated to other classes of debt.
3)The bond can be converted into the firm's common stock.
4)The bond has a sinking fund.
5)The bond has a call provision.
6)The indenture contains covenants that prevent the use of additional debt.

Accepted Answer

A) 1, 3, 4, 6 
B) 1, 4, 6 
C) 1, 2, 3, 4, 6 
D) 1, 2, 3, 4, 5, 6 
E) 1, 3, 4, 5, 6 
A) 1, 3, 4, 6 
B) 1, 4, 6 
C) 1, 2, 3, 4, 6 
D) 1, 2, 3, 4, 5, 6 
E) 1, 3, 4, 5, 6

Question 7

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Accepted Answer

A) 10-year, zero coupon bond. 
B) 20-year, 10% coupon bond. 
C) 20-year, 5% coupon bond. 
D) 1-year, 10% coupon bond. 
E) 20-year, zero coupon bond. 
A) 10-year, zero coupon bond. 
B) 20-year, 10% coupon bond. 
C) 20-year, 5% coupon bond. 
D) 1-year, 10% coupon bond. 
E) 20-year, zero coupon bond.

Question 8

Which of the following statements is CORRECT?

Accepted Answer

A) If a coupon bond is selling at a premium, then the bond's current yield is zero. 
B) If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative. 
C) If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity. 
D) The current yield on Bond A exceeds the current yield on Bond B.Therefore, Bond A must have a higher yield to maturity than Bond B. 
E) If a coupon bond is selling at par, its current yield equals its yield to maturity. 
A) If a coupon bond is selling at a premium, then the bond's current yield is zero. 
B) If a coupon bond is selling at a discount, then the bond's expected capital gains yield is negative. 
C) If a bond is selling at a discount, the yield to call is a better measure of the expected return than the yield to maturity. 
D) The current yield on Bond A exceeds the current yield on Bond B.Therefore, Bond A must have a higher yield to maturity than Bond B. 
E) If a coupon bond is selling at par, its current yield equals its yield to maturity.

Question 9

12-year bond has an annual coupon rate of 9%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 7%.Which of the following statements is CORRECT?

Accepted Answer

A) If market interest rates decline, the price of the bond will also decline. 
B) The bond is currently selling at a price below its par value. 
C) If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. 
D) The bond should currently be selling at its par value. 
E) If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today. 
A) If market interest rates decline, the price of the bond will also decline. 
B) The bond is currently selling at a price below its par value. 
C) If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today. 
D) The bond should currently be selling at its par value. 
E) If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today.

Question 10

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Accepted Answer

A) The company's bonds are downgraded. 
B) Market interest rates rise sharply. 
C) Market interest rates decline sharply. 
D) The company's financial situation deteriorates significantly. 
E) Inflation increases significantly. 
A) The company's bonds are downgraded. 
B) Market interest rates rise sharply. 
C) Market interest rates decline sharply. 
D) The company's financial situation deteriorates significantly. 
E) Inflation increases significantly.

Question 11

Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

Accepted Answer

A) $923.22 
B) $946.30 
C) $969.96 
D) $994.21 
E) $1,019.06 
A) $923.22 
B) $946.30 
C) $969.96 
D) $994.21 
E) $1,019.06

Question 12

bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default.The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Accepted Answer

A) True 
 B)False

Question 13

Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Accepted Answer

A) The bond sells at a price below par. 
B) The bond has a current yield greater than 8%. 
C) The bond sells at a discount. 
D) The bond's required rate of return is less than 7.5%. 
E) If the yield to maturity remains constant, the price of the bond will decline over time. 
A) The bond sells at a price below par. 
B) The bond has a current yield greater than 8%. 
C) The bond sells at a discount. 
D) The bond's required rate of return is less than 7.5%. 
E) If the yield to maturity remains constant, the price of the bond will decline over time.

Question 14

Corporation's 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%.The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Keys' bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1)  0.1%, where t = number of years to maturity.What is the default risk premium (DRP) on Keys' bonds?

Accepted Answer

A) 0.99% 
B) 1.10% 
C) 1.21% 
D) 1.33% 
E) 1.46% 
A) 0.99% 
B) 1.10% 
C) 1.21% 
D) 1.33% 
E) 1.46%

Question 15

Which of the following statements is NOT CORRECT?

Accepted Answer

A) All else equal, secured debt is less risky than unsecured debt. 
B) The expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero. 
C) All else equal, senior debt has less default risk than subordinated debt. 
D) A company's bond rating is affected by its financial ratios and provisions in its indenture. 
E) Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debt as spelled out in the Act. 
A) All else equal, secured debt is less risky than unsecured debt. 
B) The expected return on a corporate bond must be less than its promised return if the probability of default is greater than zero. 
C) All else equal, senior debt has less default risk than subordinated debt. 
D) A company's bond rating is affected by its financial ratios and provisions in its indenture. 
E) Under Chapter 11 of the Bankruptcy Act, the assets of a firm that declares bankruptcy must be liquidated, and the sale proceeds must be used to pay off its debt according to the seniority of the debt as spelled out in the Act.

Question 16

Which of the following statements is CORRECT?

Accepted Answer

A) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value. 
B) If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value. 
C) Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. 
D) Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. 
E) Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon. 
A) If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value. 
B) If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value. 
C) Other things held constant, a corporation would rather issue noncallable bonds than callable bonds. 
D) Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond. 
E) Reinvestment rate risk is worse from an investor's standpoint than interest rate price risk if the investor has a short investment time horizon.

Question 17

Assume that the current corporate bond yield curve is upward sloping.Under this condition, then we could be sure that

Accepted Answer

A) Inflation is expected to decline in the future. 
B) The economy is not in a recession. 
C) Long-term bonds are a better buy than short-term bonds. 
D) Maturity risk premiums could help to explain the yield curve's upward slope. 
E) Long-term interest rates are more volatile than short-term rates. 
A) Inflation is expected to decline in the future. 
B) The economy is not in a recession. 
C) Long-term bonds are a better buy than short-term bonds. 
D) Maturity risk premiums could help to explain the yield curve's upward slope. 
E) Long-term interest rates are more volatile than short-term rates.

Question 18

Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of 9.5%.The bond has face value of $1,000 and makes semiannual interest payments.If you require an 11.0% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

Accepted Answer

A) $891.00 
B) $913.27 
C) $936.10 
D) $959.51 
E) $983.49 
A) $891.00 
B) $913.27 
C) $936.10 
D) $959.51 
E) $983.49

Question 19

investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years.Which of the following statements is CORRECT?

Accepted Answer

A) Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price. 
B) One year from now, Bond A's price will be higher than it is today. 
C) Bond A's current yield is greater than 8%. 
D) Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price. 
E) Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature. 
A) Bond B has a higher price than Bond A today, but one year from now the bonds will have the same price. 
B) One year from now, Bond A's price will be higher than it is today. 
C) Bond A's current yield is greater than 8%. 
D) Bond A has a higher price than Bond B today, but one year from now the bonds will have the same price. 
E) Both bonds have the same price today, and the price of each bond is expected to remain constant until the bonds mature.

Question 20

X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.Each of the bonds has a maturity of 10 years and a yield to maturity of 10%.Which of the following statements is CORRECT?

Accepted Answer

A) If the bonds' market interest rate remain at 10%, Bond Z's price will be lower one year from now than it is today. 
B) Bond X has the greatest reinvestment rate risk. 
C) If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price. 
D) If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today. 
E) If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same. 
A) If the bonds' market interest rate remain at 10%, Bond Z's price will be lower one year from now than it is today. 
B) Bond X has the greatest reinvestment rate risk. 
C) If market interest rates decline, all of the bonds will have an increase in price, and Bond Z will have the largest percentage increase in price. 
D) If market interest rates remain at 10%, Bond Z's price will be 10% higher one year from today. 
E) If market interest rates increase, Bond X's price will increase, Bond Z's price will decline, and Bond Y's price will remain the same.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:

Ezzell Enterprises' noncallable bonds currently sell for $1,165.They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000.What is their yield to maturity?

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Which of the following statements is CORRECT?

12-year bond has an annual coupon rate of 9%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 7%.Which of the following statements is CORRECT?

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default.The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

Which of the following statements is CORRECT?

Assume that the current corporate bond yield curve is upward sloping.Under this condition, then we could be sure that

investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years.Which of the following statements is CORRECT?

X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.Each of the bonds has a maturity of 10 years and a yield to maturity of 10%.Which of the following statements is CORRECT?

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Exam 5: Bonds

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Assume that interest rates on 20-year Treasury and corporate bonds with different ratings, all of which are noncallable, are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were most probably caused primarily by:

Ezzell Enterprises' noncallable bonds currently sell for $1,165.They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000.What is their yield to maturity?

Which of the following bonds would have the greatest percentage increase in value if all interest rates fall by 1%?

Which of the following statements is CORRECT?

12-year bond has an annual coupon rate of 9%.The coupon rate will remain fixed until the bond matures.The bond has a yield to maturity of 7%.Which of the following statements is CORRECT?

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default.The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Treasury bond has an 8% annual coupon and a 7.5% yield to maturity.Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

Which of the following statements is CORRECT?

Assume that the current corporate bond yield curve is upward sloping.Under this condition, then we could be sure that

investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon.Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years.Which of the following statements is CORRECT?

X has an 8% annual coupon, Bond Y has a 10% annual coupon, and Bond Z has a 12% annual coupon.Each of the bonds has a maturity of 10 years and a yield to maturity of 10%.Which of the following statements is CORRECT?

Overview

Statements, CF, Taxes

Financial Analysis

Time Value of Money

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